Right of first refusal explained in real estate
In real estate, a right of first refusal is a contractual right that allows someone to submit an offer on a property before anyone else does. If the prospective buyer decides not to submit a bid, the seller is allowed to offer the property to someone else.
The right of first refusal, or ROFR, is often used when family members, neighbors, friends, or even tenants are interested in buying the property should it be put on the market. Real estate agents also sometimes ask sellers for the ROFR if they have clients who are interested in such properties.
A right of first refusal can be beneficial to a buyer so that they can get in on a deal without any competition. The agreement, which is generally executed by lawyers, sets out the details of the transaction, including a limited time frame for the buyer to make an offer.
In some cases, the agreement also includes a specific price or a method of calculating a future sales price. It is not the same as a right of first offer, in which the seller allows a specified party to make the first bid for the property while still marketing it to others.
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The ROFR agreement offers advantages and disadvantages for buyers as well as sellers. For buyers, there is no competition, and prices are often set in the agreement, which means that the buyer could get a really good deal if prices rise dramatically.
However, if prices have been decreasing, the buyer ends up overpaying. They have little time to make a decision or line up financing once the owner decides to sell. For sellers, because the house never goes on the market, there are no real estate agent fees.
The pre-set price means the seller could gain money or lose a lot depending on the state of the overall real estate market when the sale is being conducted. If the property is not offered to the person who has the right of first refusal, that party can sue for damages.
